While I found Terence Kealey’s case for protectionism underwhelming, it definitely got me thinking. Here are my further thoughts:
1. Early in his presentation, Kealey claimed that free trade is good for rich countries but bad for poor countries. Yet later in his presentation, he blamed free trade for the post-1980 plight of non-college workers in the UK and US. What gives? He could have argued that free trade improved First World living standards overall, but were still a net negative for non-college workers. But as far as I recall, he didn’t.
2. If Kealey really thought that free trade is good for rich countries but bad for subgroups, you would have expected him to favor a package of free trade and targeted redistribution, not trade barriers. He didn’t do that.
3. Similarly, if a country’s goal is to encourage domestic innovation, why use a debatably effective technique like protectionism, instead of simply handing out large cash prizes for successful domestic innovation? If you want X, don’t pay for Y and hope Y leads to X; pay directly for X.
4. If you really believe Kealey’s learning-by-doing story, it is unclear why even rich countries would ultimately benefit from free trade. Just because your industries are currently the world’s leaders is hardly a reason to stop struggling to improve. And on Kealey’s logic, allowing foreign competition automatically reduces native firms’ incentive to improve.
5. Kealey’s learning-by-doing mechanism ought to work in every industry, not just high-tech industries. So what’s wrong with letting comparative advantage determine what each country specializes in, and then sit back and watch every country learn how to become even better at whatever they were initially comparatively good at?
6. Kealey said relatively little about foreign investment, but on his logic, developing countries should love it. Foreigners come in – and let natives learn by doing. Even if the foreigners eventually leave, this skilled labor force now gives domestic investors a big head start. Yet in practice, protectionism and hostility to foreign investment go hand in hand.
7. If Kealey were right, remote countries should be poorer in the short-run, but richer in the long-run. Yet New Zealand remains one of the poorest countries in the Anglosphere. Weird.
8. Kealey said virtually nothing about immigration, but almost all of the countries that allegedly “grew rich under protectionism” also “grew rich under open borders.” The US, Canada, Australia, and New Zealand all spent the 19th-century welcoming foreigners. Is this strong evidence that open borders is crucial for growth? Even I wouldn’t say so.
9. The United States and other immigrant societies owe a lot of their 19th-century progress to innovative immigrants. If these immigrants had stayed in their home countries, some of this progress would have happened there. But many immigrant innovators would simply died in obscurity in their home countries. Since innovation is largely non-rival, the net effect of immigration for the world was great. True, since innovation is still partially rival, the receiving countries may still have lost. But even that is far from clear.
10. In the debate, Daniel Hannan pointed out that almost no one who claims that wages “stagnated” (or even fell) since the 1980s would actually want to go through a one-way time machine back to 1980. The literature on CPI bias strongly backs him up. Official statistics overstate inflation every single year (except 2020, where the opposite holds!), so every year official measures of our standard of living become more and more absurdly pessimistic.
11. There was one issue that both Kealey and Hannan got wrong: They both overstated the importance of international trade. Even under complete free trade, the large majority of trade is internal. Why? Because transportation costs pull countries apart from each, and social networks bind each country together. National productivity matters more for prosperity than free trade, so Hannan’s enthusiastic adjectives were over-the-top. But this is still a minor error compared to Kealey’s hyperbolic pessimism.
READER COMMENTS
Mark Brady
Aug 30 2021 at 4:16pm
Daniel Hannan, not Daniel Hannon! Or even Daniel John Hannan, Baron Hannan of Kingsclere!
Jose Pablo
Aug 30 2021 at 7:21pm
Why should Kealey’s argument work only if there are borders involved?
I mean they should also apply to trade among different regions within the same country: “internal free trade” should be good for rich “regions” but bad for poor “regions”.
So stablishing trade barriers between Arkansas and California should be good for Arkansas.
But why stopping at the State level? The argument should also apply to different counties within the same state: “state level free trade” should be good for rich “counties” but bad for poor “counties”.
So stablishing trade barriers in Arkansas between Pulaski and Lee should be good for Lee.
But why stopping at the county level? The argument should also apply to different cities within the same county …
But why stopping at the city level? The argument should also apply to different streets within the same city …
But why stopping at the street level? The argument should also apply to different people living in the same street.
So, “individual free trade barriers” should, obviously, improve the economic situation of Mr. Poor. After all, if he/she has to provided himself with food, shelter and clothes sure he/she will always be “occupied” … very much, indeed. With plenty of opportunities to improve his/her skills on all this metiers … almost to the point of perfection
Phil H
Aug 30 2021 at 11:15pm
I just want to pick out one item and comment on it, because I’ve seen a few of the writers on here talk about the value of prizes, and it mystifies me.
“3. Similarly, if a country’s goal is to encourage domestic innovation, why use a debatably effective technique like protectionism, instead of simply handing out large cash prizes for successful domestic innovation? If you want X, don’t pay for Y and hope Y leads to X; pay directly for X.”
The problem is that any operationalization of X just seems to lead into spirals of fraud. Once you announce your “prize,” if it has significant monetary value, then someone will optimize for the winning conditions, not for beneficial work. For example, if you announce that the prize is for having advanced technology, the solution is to steal it. If your prize is for building 20,000 cars in a year, someone will build Trabants. If your prize is for selling 20,000 cars in a year, someone will sell them to their own subsidiary. Exactly the same problems that apply to subsidies (which this website hates) apply to prizes.
There are two exceptions to the problem of prizes. (1) prizes awarded post hoc without the conditions being announced in advance. This means that no-one knows exactly what the prizes will be given for, so no one can optimize. BUT not announcing your conditions in advance means that the risk of nepotism, in-group thinking, and unrigorous methodology is much, much higher. (2) prizes for innovation on the cutting edge of science (like the Nobels). For the most part, you can’t fake or steal new scientific discoveries. BUT Nobel work is usually not directly good for the economy.
I don’t know how relevant this is to the debate with Kealey, but I’ve been thinking about the prize problem for a while.
David Q
Sep 1 2021 at 12:47am
On awarding prizes:
Wherever possible, have the beneficiary inspect the quality, decide how to inspect, decide whether to inspect, decide what to inspect, and decide whether to pay the benefactor.
If there are multiple benefactors, then the benefactors who pay attention to both what the beneficiaries want, and what the beneficiaries don’t care about, will outcompete benefactors who skimp on what beneficiaries want and they’ll outcompete benefactors are too generous with what beneficiaries don’t want.
The goal of all this is to have the people who care the most and have the most to lose pay the most attention, but not waste time paying too much attention.
Benefactors will still try to game the system in their favor by ripping people off; but in the long run, it will tend to be in areas the beneficiaries don’t care as much about.
Information asymmetry throws sand into the gears of all this.
John R. Samborski
Sep 1 2021 at 12:10pm
Is the Terence Kealey who supports protectionism the same Terence Kealey who says governments shouldn’t pay for scientific research?
Niko Davor
Sep 2 2021 at 9:54am
Is this debate viewable online? Kealey is a famous advocate for privatizing university research. I thought he was a serious free market fanatic. I’d be surprised and disappointed if he’s pro-protectionism, but I’d like to read/hear him myself to be sure that is what he’s saying.
I’ve done some Internet searches on this debate and I can only find this blog.
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